Taking Stock / Moments of Candor, Consideration and Coziness

Netanyahu and Steinitz do not yet understand the difference between the personal interests of a few wealthy businessmen and the interests of the business sector as a whole.

"I don't know when the penny dropped for me about the Israeli economy," a leading member of the government-appointed concentration committee told me last week, before proceeding to spin a strange tale.

The light-bulb may have alit after a visit from one of the biggest of Israeli businessmen, he related. "He tried to convince me that the committee's recommendations would constrain his ability to do business in Israel. When I asked for an example, he said that if the recommendations were implemented he wouldn't be able to carry out a given acquisition for his business, even though it fit well with one of his other companies."

by Alon Ron
Alon Ron

But if the big conglomerates were hit with ownership restrictions, the businessman explained to the concentration committee member, if he bought the company he wanted and made it a subsidiary of his business group he would not be able to exploit its natural synergy with his original company because both are publicly traded.

"To take advantage of synergies, assuming there were any, he'd have to technically merge the two companies. So I asked him why that would be a problem. Without missing a beat he said, 'My holding in the company would be diluted. It doesn't make economic sense for me.' He was saying that the merger would be good for the company and perhaps for the economy, but because it wouldn't be good for him personally, he wouldn't do it," the committee member told me.

Contained in that little anecdote is the story of economic concentration in Israel - the economy's domination by a handful of powerful figures with good connections - and the battle between the committee and the tycoons.

Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz must be applauded for establishing the panel, which is officially named "the Committee on Increasing Competitiveness in the Economy". They did not cringe at pressure from the moguls' pet newspapers, which sought to bury the committee or at the very least to cripple it. Two weeks ago Netanyahu and Steinitz, together with the Governor of the Bank of Israel, Stanley Fischer, addressed the public at a press conference to mark the official submission of the committee's recommendations. In it they described the terrific harm caused by the high degree of concentration in Israel to the economy, to competition and to democracy itself.

But Netanyahu and Steinitz do not yet understand the difference between the personal interests of a few wealthy businessmen and the interests of the business sector as a whole. They are still saying that the committee's recommendations must be "measured and balanced" for the sake of the business community. But they have it backward. The faster economic concentration is reduced, the better it will be for business overall.

A moment of candor from a banker

As soon as the committee issued its final recommendations, Steinitz hastened to meet publicly with the heads of Israel's banks to send the message that the Finance Ministry has not become anti-business.

What a strange move. Why did Steinitz think their interests were congruent with those of the business sector? Didn't it occur to him that part of the reason for the credit crunch, which the bank directors had warned was coming, was precisely because the banks lent so much of their capital to a handful of giant business groups that are now having difficulty borrowing more to pay the original loans?

A few days before Steinitz's meeting with the bankers, I had a meeting with a leading banker myself. I inquired about efficiency in the banking system. Among other things, I asked whether he agreed with me that surplus employees and other unnecessary expenses were costing Israel's banks an additional NIS 6 billion a year that forced up the price of fees and credit.

His answer left me aghast. He said he estimated the extra cost of banking inefficiency at closer to NIS 10 billion a year. Some of that additional expense, of course, can be blamed on the unions. But still.

Israel's banks nevertheless generate real returns of around 10% a year - no mean feat in light of these enormous superfluous costs. But that's because they're simply passing them on to their customers, and especially the ones at the bottom of the banking food chain, individual customers and small businesses.

Did the banks' exposure to big business come up in Steinitz's conversation with the bankers? Did the finance minister ask why they keep lending more and more to the same people? Did he ask them about their sky-high extra costs and the feeble competition between banks?

Probably not. Maybe at their next meeting.

A moment of consideration

Meanwhile, at last week's cabinet meeting Deputy Prime Minister Dan Meridor announced that he thought the ministers should not vote on the committee's recommendations. Instead, a new committee should be created to discuss the committee's report, he suggested.

Meridor explained that he was worried because he hadn't heard yowls of protest from the rich and powerful who stood to become less so if the recommendations were put in place.

From this we may learn that Meridor is attentive to the moods and public pronouncements of the rich and powerful and feels the cabinet should hold off on the committee's recommendations until the tycoons have had their say.

After googling "Dan Meridor" and "economic concentration" (in Hebrew ), I feel confident in saying that until last week's cabinet session the minister showed little interest in economic concentration or what the fat cats felt about it. There was no evidence that he cared that most local newspapers claimed economic concentration was not a problem in Israel. (That has been refuted repeatedly, not least by the International Monetary Fund ). Meridor was seemingly unconcerned by the op-eds in the tycoons' newspapers calling the economic concentration committee superfluous. Other than his comment last week, the only other time he seems to have said anything about economic concentration was precisely 20 years ago, when he called for preventing concentration in the telecommunication sector. Apparently developments since then assuaged his worries.

Justice Minister Yaakov Neeman called the committee's conclusions a milestone for the Israeli economy and that of other countries too. He's right, but the question remains why his ardent support for divestiture by the conglomerates was born just last week rather than six months ago, say, or two or three years ago.

Many things can be said about Netanyahu, but this cannot be denied: He never hesitated to speak out against economic concentration and its dangers, even when the tycoons were at their most powerful and were essentially running the country, and he began doing so even before the topic reached the public domain.

Today, with bleeding tycoons littering the floor, journalists and politicians are coming out of the woodwork left, right and center to say what a bad thing concentration is. But one suspects that when the tide turns, when the tycoons get off the floor and dust themselves off, the same journalists and politicians will change their tune.

A moment of coziness

The sheer vapidity of the public discourse in Israel was glaringly evident last week as the question suddenly arose: What will the tycoons do with the money from the sales of their holdings dictated by the economic concentration committee, and above all, where? Will they use that money in their cozy home, Israel, or take it abroad?

That question reminds me of the old chestnut about a guy who wins the lottery and is asked by a friend how he will spend it. "I owe Moishe, and Avram, and income tax, and my suppliers," he said, shrugging. "And the rest?" his friend pressed. "The rest will have to keep waiting," he snarled.

The same applies to the owners of the huge business pyramids. Even after they finish selling off the assets to comply with the new regulations they will still owe mountains of money - to the general public, of course. They will still owe money to our retirement funds, which bought their bonds. They will still owe money to the banks they borrowed from. Some will still be billions, or even tens of billions of shekels, in debt.

It's been said before, but it needs to be reiterated over and over until it sinks in: The equity belonging to the Israeli tycoons who control the vast business pyramids, the cartels and the monopolies is negligible, in economic terms, the equivalent of no more than 1% to 2% of the public's financial portfolio.

The moguls won't be rushing to invest their personal fortunes abroad, where they don't control the regulation and have no sway over the politicians, the media or the banks. If they do take any money abroad, it will be peanuts. And by the way, international diversification of investment is a good thing, and should be encouraged.

Last week I asked one of Israel's business giants, one of those who created value over the last decade rather than destroying it, why most of his investments were in Israel. He looked at me in astonishment. "What relative advantage would I have abroad?" he inquired. "What do I know about foreign investment? I made all my money in Israel. It never occurred to me to toss it to the winds in America or Europe."